Crude Oil Prices Attempting to Break Higher

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WTI crude oil prices have been oscillating in a downward sloping channel for the past few weeks and the decline has formed a bullish continuation pattern. Although the formation is not a perfect flag, pennant, wedge, or triangle, it does appear to be corrective. More often than not corrective patterns like this ultimately break higher and the original up trend extends.

Crucial support at $57.0 held on a closing basis last week and Friday’s move up and the attempt to close over the upper trend line of the formation on Monday indicates prices should rise to at least $61.6 over the next few days.

Monday’s hanging man is negative, but so far Friday’s $59.13 midpoint has held. This is also the 38 percent retracement of the move up. A close below this would complete the hanging man and call for another oscillation lower to test support and possibly the lower trend line of the corrective formation.

For the past few weeks WTI crude oil prices have risen significantly, and for the first time since early December 2014 prices closed above $60.0 last week. However, many traders are questioning the long-term validity of the price rise continuing due to concerns of a persistent supply glut, and the technical factors show that the market reached a crucial decision point at $62.58 last week.

The June WTI futures contract met crucial resistance at $62.58 on Wednesday, May 6, and as called for in our weekly Kase Crude Oil Commentary, prices have begun to pullback in a corrective manner. The correction is taking place after a blow-off high and evening star setup formed that same day. The evening star (some might say shooting star) was both completed and confirmed on Thursday when prices closed below the midpoint and open of Tuesday’s Harami bar. In addition, bearish divergences on the KaseCD and KasePO were confirmed on Friday. The combination of negative short term technical factors indicates the downward correction should extend and will likely form Wave IV of a longer-term five wave formation that projects to target in the mid-to upper $60s and even the low $70s.

We expect the pullback to challenge at least $56.2. This is the 38 percent retracement of the move up from $45.93 and is near the bottom of the sub-wave 4 of III. If prices are going to extend to new highs in the next week or so, $56.2 must hold. Otherwise, a close below $56.2 would call for the 50 and 62 percent retracements at $54.3 and $52.3. For now, it looks as though $56.2 will hold. The long-term outlook would only shift back to being bearish upon a close below $52.3. We do not expect to see a decline of that magnitude.

Today’s decline was nominal, so the next few days will be crucial for the near-term direction. A close over last Thursday’s $59.82 midpoint would shift the near-term outlook back to positive, call for another test of $62.5, and likely open the way for the five-wave pattern to unfold to upper targets of $66.8 and $71.5 over the course of the next few months.

It is hard to deny the strength of the natural gas price rally over the past two weeks. Last week’s bullish engulfing line, April’s bullish hammer and morning star setup, and bullish daily divergences on the KasePO, KaseCD, MACD, RSI, and Stochastic are all technical evidence that the move down may finally be complete. However, many traders are skeptical of the move up and are asking what fundamental factors would support a recovery over the course of the longer-term. It is a fair and accurate question. Tomorrow’s U.S. Energy Information Administration (EIA) Natural Gas Weekly Update should provide a strong clue regarding the potential strength of a continued natural gas price rise.

In addition to the aforementioned bullish technical factors on the monthly, weekly, and daily charts, the short term technical factors and wave formations show evidence for a move to at least $2.93. This is a decision point because it is the 2.764 (XC – shown in red) projection for the wave up from $2.481, the 1.00 (E – shown in pink) from $2.557, and the 1.618 (L – shown in purple) from $2.747. In addition, $2.93 is the last level protecting mid-March’s $2.982 swing high. A sustained close over this would open the way for an extended move to targets above $3.00. However, $2.93 will not likely be tested until after tomorrow’s EIA report, if at all, because most traders are waiting for confirmation from another lower than expected build.

There is good reason to be suspicious of this move up, and a disappointing EIA report tomorrow could be the catalyst to turn prices lower again in very short order. Therefore, until there is a sustained close over $2.93 caution is warranted.

The daily chart has formed a hanging man and evening star setup as of this mid-day analysis, and a close below Monday’s $2.78 midpoint would complete the pattern. This would then open the way for $2.65, the 50 percent retracement of the move up and last week’s midpoint. A close below $2.65 would confirm the move up is over and most likely point toward the market settling into a trading range while it sorts itself out.

Brent crude oil prices will likely test a key decision point at $68.0 this week. This is the 1.00 projection for the wave up from $50.1, and a confluent projection for the sub-waves up from $53.63. A close over $68.0 would confirm that a long-term bullish recovery is underway. Narrowing calendar spreads support the move up, but are still wide by historic standards. First class long permissions (blue dots) on the KEES indicator also confirm the positive tone.

That said, momentum is waning on the KaseCD and is setup for a bearish divergence (higher high in price with lower high in momentum). The KasePO is quickly nearing overbought territory. There are also a daily bearish hanging man and evening star setup. These and a few other negative factors tell us that Brent will likely stall at $68.0. We expect to see a significant correction take place to test the mettle of the market before the move up extends much higher than $68.0.

Natural gas had been supported by late winter weather in regions of the U.S. through late last week. However, as expected, natural gas prices finally broke lower out of the large scale corrective pattern that formed during the calendar month of March. The move down is poised to continue, but in the very short term, there may be a small pullback first.

The May futures contract broke out of another small bearish flag this morning on the 240-minute equivalent Kase Bar chart and fell to a new contract low of $2.583. This is an important area of support, and a potential short term stalling point because May’s $2.583 low is in line with the 1.00 target for the move down from $2.949 (as shown in the chart above), and is also near the continuation chart’s swing lows of $2.567 and $2.578. In addition, a bullish KasePO divergence (green trend line) was confirmed this morning.

All of these factors are positive for the very short term. They indicate that a pullback may take place ahead of tomorrow’s U.S. Energy Information Administration (EIA) Natural Gas Weekly Update. However, the longer-term technical and fundamental factors indicate resistance should hold and that the move down will extend. Once natural gas prices have definitively broken support between $2.57 and $2.60, look for $2.51 and $2.46, the latter of which is also the 0.618 projection of the compound wave $2.949 – 2.608 – 2.686.

Look for resistance at $2.65 to hold. This is the 21 percent retracement of the decline from $2.949 and is near the lower trend line of the small bearish flag that broke lower this morning. Even a pullback to $2.72, which is the 38 percent retracement, would be considered a normal correction. A close over $2.72 is doubtful without a bullish surprise from external factors.

During the calendar month of March the April natural gas futures contract has traded in a range bound between $2.64 and $2.87. Most fundamental and technical factors are still negative for the long-term. The move up at this point is still corrective and will only delay the inevitable decline that is ultimately coming. However, late winter weather concerns continue to support the market and have rattled the nerves of traders enough over the past two days to push natural prices above $2.87 to challenge key resistance at $2.89 ahead of tomorrow’s U.S. Energy Information Administration (EIA) Natural Gas Weekly Update.

The market is hinting that a bullish EIA update may be expected, but if the number is disappointing, this natural gas price rise will collapse in upon itself and could be the catalyst the finally push prices lower to challenge key support targets.

The wave formations up from $2.589 (not shown), $2.641, $2.662, and $2.674 all show that $2.89 is a confluent wave projection. It is also the 62 percent retracement from $3.045 to $2.641. The confluence of wave projections and retracements at $2.89 make it the key decision point for an extended correction to at least $3.00 and possibly $3.07. At the time of this analysis, natural gas prices are trading right at $2.89, but they will need to settle above this to open the way for $3.00 in early trading tomorrow before the EIA update is released. Unless the EIA report is extremely bullish, it is doubtful that prices will settle above $3.07 in coming days.

Look for support at $2.78. This is in line with the $2.775 swing low, the midpoint of the recent range between $2.64 and $2.87, and the midpoint of the March 12 and 17 candlesticks. A close below $2.78 would indicate the move up has failed to extend once again.

Natural gas prices are still oscillating in the corrective range between approximately $2.60 and $3.00. Early in the week it looked as though natural gas prices were ready to continue the decline. However, while there is little doubt that the long-term bias is negative, Wednesday’s price rise has called into questions how soon natural gas prices will fall to new contract lows.

Monday’s gap from $2.783 was filled early Wednesday and then April futures overcame the 0.618 projection at $2.80 for the wave up from $2.641. The $2.80 level was also near the 62 percent retracement of the decline from $2.87 to $2.662. The confluence of the wave projection and retracement at $2.80 makes it a crucial decision point for the near term outlook. Should natural gas prices close over $2.80, look for at least $2.89 because it is the 1.00 projection. This level is most important because it is also the 62 percent retracement from $3.045 to $2.641, the 0.618 projection for the wave up from $2.589 (not shown), and is in line with last weeks $2.87 swing high. A close over $2.89 would open the way for an extended correction and would further delay a decline to new contract lows.

The first class long permissions (blue dots) for the Kase Easy Entry System (KEES) indicate the move up will likely continue, and that $2.89 should at least be tested tomorrow. However, the bearish KCDpeak (red K above 2.848) indicates the move up is already overbought on the 120-minute equivalent Kase Bar chart. A move above $2.848 would negate the KCDpeak, and as long as the KEES permissions remain long (blue dots) the near-term bias will remain positive.

Look for support at $2.73. A close below this over the next few days would shift the near-term bias back to negative and call for the $2.641 swing low to be challenged.

Cold weather continues to support natural gas, but the wide sweeping frigid conditions have not been enough of an influence to drive prices higher. Fundamental and technical factors leave little doubt that the outlook for the next several months is bearish, but for now, natural gas prices are stuck in a trading range bound between approximately $2.55 and $3.00.

Prices fell last week after the disappointing U.S. Energy Information Administration (EIA) Natural Gas Weekly Update, and a swing low of $2.641 was made on Tuesday. The $2.80 midpoint of last Thursday’s candlestick held Wednesday morning, which may be an early indication that another disappointing EIA update is expected tomorrow. The $2.80 level is confluent resistance because it is also the 38 percent retracement of the decline from $3.045 to $2.641.

There are a few short term positive factors (green arrow and triangle) triggered by KaseX on the $0.05 KaseBar chart, and a close over $2.80 would open the way for key resistance at $2.90. The $2.90 level is the 62 percent retracement from $3.045 and the 0.618 projection for the wave $2.589 – 3.045 – 2.641. This is crucial, because waves that overcome the 0.618 projection typically extend to at least the 1.00 projection, in this case $3.10. We expect $2.90 to hold, but a close over this level would shift near term odds in favor of another attempt at $3.10 and higher.

First support is $2.70, and a move below this would call for the $2.641 swing low and $2.589 contract lows to be challenged. The most important target is still $2.55, because the technical show that it is the gateway objective for a decline into the low $2s. It will likely be at least a few more weeks before prices close below $2.55.

So for now, our analysis leads us to believe that a near term test of resistance at $2.80 and possibly $2.90 will take place, but that $2.90 will hold and prices will continue to oscillate in a sideways range.

Natural gas’s recent upward correction has been driven by cold weather, and still has a modest chance to extend. However, the key question that should be asked is how long will natural gas prices be able to sustain upward momentum once weather moderates? Several technical factors are already showing that the move up may be over, and that a continued decline may take place sooner than some might have expected.

The move up stalled at $3.045 on Monday morning. From a technical standpoint, this was a bit disappointing because the wave $2.589 – 2.891 – 2.681, which had previously met it 1.00 projection, failed to meet its 1.382 target at $3.098. This was especially negative because Monday’s decline and close below Friday’s $2.91 midpoint triggered a bearish Dark Cloud Cover (marked by the Kase Candles indicator’s pink dot and DarkC label). Dark cloud covers are reversal patterns, and the formation would be confirmed upon a close below Friday’s $2.852 open.

Subsequently, the attempted moves up on Tuesday and Wednesday have failed to close over the $2.94 midpoint of Monday. A close over $2.94 would negate the dark cloud cover, and open the way for another attempt at $3.098 and $3.17, the 1.382 and 1.618 targets for the primary wave up from $2.589, respectively. However, the failure to close over $2.94, so far at least, is negative.

The key for the down move will be a close below $2.85. As previously stated, $2.85 is the confirmation point for the dark cloud cover. It is also the 0.618 projection for the wave $3.045 – 2.839 – 2.974. Therefore, a close below $2.85 would call for at least $2.77. In our detailed weekly price forecast, $2.77 was pegged as the major decision point for a continued decline and retest of the $2.589 contract low. As shown by the blue wave extensions, at minimum, a close below $2.77 should clear the way for the 1.618 projection at $2.64.

Unless there is a shock from tomorrow’s U.S. Energy Information Administration (EIA) Natural Gas Weekly Update, it looks as though the move up has stalled, and that major test of support at $2.77 will take place in the next few days. The near-term outlook for natural gas prices is not yet technically bearish, but a sustained close below $2.77 will help to shift the bias strongly in that direction.

Most technical factors now indicate that WTI’s upward correction has failed and that the near term WTI price outlook is negative again. Monday’s decline broke the lower trend line of a bullish ascending wedge. Formations like this break higher around 75 percent of the time, so failures like this do not generally bode well for a continued price rise.

More importantly, WTI prices are about to take out the crucial $48.2 swing low. This level is important because it is the 1.00 projection for the wave $55.05 – 48.2 – 54.92, the 62 percent retracement from $44.37 to $55.05, and the key swing low for the upward wave formation from $44.37. Taking out $48.2 would call for at least $45.5, and very likely to $43.8 and lower.

The only real hope for a continued WTI price rally in the near term would be for prices to hold $48.2. Look for resistance at $51.0 and $52.5. A close over $52.5 would call for another test of the triple top of $55.0.

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